Indonesia’s decision to cut its 2026 nickel ore quota to roughly 260 million to 270 million wet metric tonnes has tightened a market that many analysts still expect to remain in surplus. The risk is now compounded by water shortages at the Morowali Industrial Park, where prolonged El Niño conditions could reduce processing output by 30% to 40% if alternative water sources are not secured.
LME nickel was trading near US$16,900 per tonne in early September, close to the level at which some Indonesian smelters become increasingly vulnerable to margin pressure. Below approximately US$17,000 per tonne, higher ore costs, reduced utilization and energy expenses could force marginal facilities to slow or idle production.
The market is not yet in a confirmed global deficit. Inventories, nickel pig iron (NPI), matte, mixed hydroxide precipitate (MHP) and Philippine ore imports continue to provide a buffer. But Indonesia’s quota cut has reduced that buffer, while weather risk could remove operating capacity faster than new supply can replace it.
Indonesia’s quota cut changes the 2026 supply equation
Indonesia’s Ministry of Energy and Mineral Resources has set the 2026 nickel ore Work Plan and Budget, known as RKAB, at approximately 260 million to 270 million tonnes. That compares with roughly 379 million tonnes approved for 2025, representing a reduction of about 29% to 31%.
The policy shift is significant because Indonesia accounts for approximately 60% of global mined nickel supply. Its integrated mining and processing system has been the main source of nickel supply growth in recent years, particularly in NPI, ferronickel, nickel matte and MHP.
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Crux Investor’s analysis and Mysteel’s RKAB assessment both point to a material gap between permitted ore supply and potential smelter demand.
| Indicator | 2025 | 2026 outlook | Market implication |
|---|---|---|---|
| Indonesian nickel ore quota | About 379 million wmt | 260–270 million wmt | Roughly 29%–31% reduction |
| Estimated domestic smelter demand | : | About 320–350 million wmt | Demand exceeds the quota |
| Philippine ore imports | : | 25–30 million tonnes possible | Partial relief for Indonesian processors |
| LME nickel reference | : | About US$16,900/t in early September | Near a key smelter-margin threshold |
| Potential Morowali output reduction | : | 30%–40% if water shortages persist | Significant disruption risk |
The distinction between a quota, actual production and realized shipments is important. A 270-million-tonne national ceiling does not guarantee that miners will produce the full amount. Permitting, logistics, equipment, weather and working capital can all reduce output.
The Indonesian government has also left room for selective quota revisions. That means the market must track not only the national RKAB number but also monthly approvals, mine-level production and smelter utilization.
Why RKAB mechanics matter to operators
RKAB is an annual work plan and budget approval that determines how much ore a mining company can produce. Indonesia’s shift toward tighter annual approvals gives regulators more control over supply and allows them to respond to prices, domestic processing requirements and environmental conditions.
For miners, the system creates a planning challenge. A company may have reserves, equipment and a downstream customer but still lack sufficient annual authorization to operate at nameplate capacity.
For smelters, the issue is even more direct. Indonesian processing capacity has expanded faster than the country’s current approved ore allocation. SMM’s Indonesian nickel market review reported stable domestic ore prices alongside higher NPI prices, suggesting that processors are already absorbing increased feedstock pressure.
If domestic demand reaches 320 million to 350 million tonnes, the gap against the RKAB range could be approximately 50 million to 90 million tonnes before imports, inventories or policy changes are considered.
HPAL facilities require reliable ore, water, acid and energy supplies to produce battery intermediates.
Morowali adds an operational shock
Quota discipline is a policy-led constraint. Morowali’s water problem is an operational risk.
The Morowali Industrial Park in Central Sulawesi is one of Indonesia’s largest nickel-processing centres. Its facilities include NPI, stainless steel and HPAL operations, all of which depend on reliable water and power infrastructure.
Reports cited in Procurement Resource’s nickel market coverage have linked water scarcity in Morowali to the risk of lower nickel output. Other market reports say El Niño-driven drought has reduced river flows and could force production cuts of 30% to 40% if new water sources are not secured.
The figure should be treated as a potential scenario rather than a confirmed full-park outage. The eventual impact will depend on rainfall, reservoir levels, alternative water infrastructure, hydropower availability and which processing lines receive priority.
The risk is nevertheless material because HPAL is particularly water-intensive. Industry estimates cited by Argus place water use at roughly 200 to 400 cubic metres per tonne of nickel for some HPAL facilities.
A sustained 30% to 40% reduction at Morowali would not necessarily translate into an equivalent loss of global refined nickel. Some production could be deferred, replaced by other Indonesian sites or offset by inventories. But it would tighten specific products and raise competition for available ore and intermediates.
Philippine imports provide relief, not a full solution
Indonesia imported more than 11 million tonnes of Philippine nickel ore in the first seven months of 2026, with full-year imports potentially reaching 25 million to 30 million tonnes.
The trade route is becoming an important pressure-release mechanism for Indonesian smelters. However, it cannot fully replace the reduction in domestic ore quotas.
Philippine ore imports face several constraints:
- Seasonal rainfall can disrupt mines, roads and ports.
- Ore grades and moisture content may not match every Indonesian facility.
- Shipping availability can tighten when multiple smelters compete for cargoes.
- Philippine mining and export policy can change.
- Delivered ore costs may be higher than domestic feedstock.
At the upper end of the estimate, 30 million tonnes of imports could narrow the Indonesian ore gap. It would not eliminate a shortfall of 50 million tonnes or more if domestic smelter demand remains near capacity.
A global surplus can coexist with local tightness
The headline global balance remains unsettled.
Some forecasters expect a modest surplus in 2026, while the International Nickel Study Group outlook points toward a market that could approach a small deficit. The difference reflects assumptions about Indonesian output, battery demand, inventories and the pace of lithium-iron-phosphate battery adoption.
Several factors can keep the global market in surplus:
- Exchange and private inventories can absorb temporary supply interruptions.
- NPI and matte may remain available even as ore markets tighten.
- Stainless steel demand is uneven across major consuming regions.
- LFP batteries reduce nickel intensity in parts of the electric-vehicle market.
- Existing Indonesian capacity may continue operating below nameplate rates.
But nickel products are not interchangeable. Ore, NPI, matte, MHP, nickel sulfate and class-one refined nickel serve different markets and require different processing routes.
That distinction is central to the 2026 outlook. A market can hold a broad surplus while battery-grade MHP, limonite ore or exchange-deliverable class-one nickel becomes more expensive or less readily available.
Class-one versus class-two nickel
Class-one nickel generally refers to refined metal with at least 99.8% nickel content. It includes products such as cathodes, briquettes and certain powders used in alloy and battery supply chains.
Indonesia’s recent supply growth has been concentrated more heavily in class-two products and intermediates, including NPI, ferronickel, matte and MHP. These products can be converted into higher-purity material, but conversion requires additional capacity, energy, acid and capital.
The market therefore needs to distinguish between:
- Ore availability: whether mines can supply the required saprolite or limonite.
- Intermediate production: whether NPI, matte or MHP plants are operating.
- Conversion capacity: whether intermediates can be upgraded into nickel sulfate or refined metal.
- Class-one inventories: whether exchange and private stocks can cover short-term demand.
- Battery chemistry: whether cathode producers require nickel-rich material.
Indonesia’s quota cut limits the pace of new supply growth across both stainless steel and battery routes. The Morowali water risk is more likely to affect processing rates and specific intermediates in the near term.
What the outlook means for nickel equities
For investors, the most useful approach is to separate exposure to nickel prices from exposure to Indonesian operating risk.
The stronger part of the sector is likely to be made up of low-cost, integrated class-one producers with secure ore, established refining capacity, reliable infrastructure and manageable balance sheets. These companies may benefit from higher prices without being as exposed to imported ore, quota uncertainty or Morowali water shortages.
The more vulnerable group is marginal supply: high-cost operations, standalone smelters, projects dependent on expensive feedstock, and producers with weak liquidity or limited processing flexibility. A nickel price below US$17,000 per tonne could expose those companies to sharper margin compression.
A stock-picker’s framework should therefore focus on:
| Equity exposure | Potential advantage | Main risk |
|---|---|---|
| Low-cost class-one producer | Direct leverage to refined nickel prices | Grade decline, maintenance or geopolitical risk |
| Integrated Indonesian operator | Access to local ore and downstream capacity | RKAB allocation and water availability |
| HPAL and MHP producer | Exposure to battery-material demand | Water, acid, power and ramp-up risk |
| High-cost standalone smelter | Upside if prices rise sharply | Idling risk below US$17,000/t |
| Development-stage nickel project | Long-term supply scarcity exposure | Financing, permitting and execution |
This is not a blanket bullish signal for nickel equities. The same quota cut that supports prices can reduce the operating volumes of companies that depend on high-throughput Indonesian smelters.
Three indicators to watch
The 2026 nickel market will be shaped by three measurable indicators:
1. Realized Indonesian ore output
Monthly mine production, shipments and stockpile data will show whether the 260-million-to-270-million-tonne RKAB is binding in practice.
2. Morowali water and processing rates
Rainfall, river levels, alternative water projects and HPAL utilization will reveal whether the 30% to 40% disruption scenario is emerging or fading.
3. Philippine import volumes
Imports reaching 25 million to 30 million tonnes would reduce the pressure on Indonesian smelters. A weaker flow would leave processors more exposed to domestic quota restrictions.
Base case: tighter, but not yet a confirmed deficit
The base case for the nickel market outlook 2026 is a tighter and more volatile market, not necessarily a global shortage.
Indonesia’s RKAB cut should slow low-cost supply growth and increase competition between stainless steel and battery-material producers. Philippine ore imports and existing inventories can provide some relief, while NPI, matte and MHP may prevent an immediate class-one shortage.
The bull case requires a combination of persistent Morowali water stress, realized Indonesian production below the quota range, Philippine imports near the lower end of expectations and no broad RKAB increase.
The bear case would involve normal rainfall, Philippine imports near 30 million tonnes, selective Indonesian quota additions and continued weak nickel demand from stainless steel and batteries.
The central issue for operators and investors is no longer simply how much nickel Indonesia can produce. It is which nickel units are available, at what cost and through which processing route.
LinkedIn snippet
Indonesia’s 2026 nickel ore quota has been cut to roughly 260–270 million wet metric tonnes from about 379 million tonnes in 2025. At the same time, El Niño-related water shortages at Morowali could reduce processing output by 30%–40% if conditions persist.
The global market may remain in surplus, but ore, MHP, NPI and class-one nickel will not tighten equally. Our analysis examines the implications for smelters, battery supply chains and nickel equities.
X snippet
Indonesia’s nickel market faces two overlapping risks: a 260–270 Mt 2026 ore quota and a potential 30%–40% Morowali processing cut linked to water scarcity.
Global surplus may persist, but specific nickel units could tighten sharply. The key variables are water, Philippine imports and RKAB revisions.
